Euro Drops as ECB Said to Oppose Greek Debt Loss; Yen Weakens on Deficit

The euro fell for the first time in three days versus the dollar after the European Central Bank was said to oppose restructuring its Greek bonds, adding to concern the nation will fail to win a deal to reduce its debt.

The yen reached its weakest level in almost two months against the U.S. currency after Japan reported its first annual trade deficit in 31 years, stoking concern the country’s fiscal health may deteriorate. South Korea’s won was the best performer versus the dollar as exporters converted their foreign exchange to meet month-end cash demand. The dollar gained against most its major counterparts as Federal Reserve policy makers prepared to give projections for borrowing costs for the first time.

“The bondholders seem to be splitting hairs about taking a big loss or a bigger loss that is bringing on another wave of nervousness to the market,” said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York. “We don’t think that a Greek default will send Europe in to a tailspin so the euro won’t be tumbling to $1.20.”

The 17-nation euro slid 0.6 percent to $1.2964 at 10:44 a.m. New York time. It reached $1.3063 yesterday, the highest level since Jan. 4. The yen depreciated 0.8 percent to 78.28 per dollar, the weakest since Nov. 29. The euro gained 0.2 percent to 101.51 yen.

Dollar Measure

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.5 percent to 80.211, before Federal Reserve policy makers decide on interest rates.

The Fed said last week it will provide two charts with forecasts for the benchmark rate after the Federal Open Market Committee meeting today. The central bank left the target for overnight loans between banks in a range of zero to 0.25 percent last month and reiterated that economic conditions may warrant “exceptionally low” rates “at least” through mid-2013. It will keep the key rate unchanged today, according to a Bloomberg survey.

South Korea’s won advanced 0.2 percent to 1,125.95 per dollar after financial markets were closed the past two days for the lunar New Year holiday. Overseas investors bought more Korean shares than they sold for a 10th straight day according to exchange data.

Pound Down

The pound fell 0.3 percent to $1.5580 after a report showed U.K. gross domestic product contracted 0.2 percent from the third quarter, compared with a drop of 0.1 percent forecast by 33 economists in a Bloomberg News survey.

The declines in sterling were limited after Bank of England Governor Mervyn King said yesterday that policy makers can increase stimulus again if needed to guard against a “renewed severe downturn.”

It gained 0.2 percent to 83.24 pence per euro.

The yen dropped against the dollar after the Ministry of Finance said Japan’s exports dropped 8 percent in December from a year earlier. The median estimate of 27 economists surveyed by Bloomberg News was for a 7.4 percent decline.

The U.S. currency has strengthened 1.6 percent against the yen so far this year after depreciating 5.2 percent last year and almost 13 percent in 2010.

Yen Matters

“We could be at some kind of long-term turning point on dollar-yen, although I think it might turn like an ocean liner rather than a speed boat,” said Paul Day, chief strategist at Market Securities in London. A close above 78.50 this month could see the dollar could climb as high as 95.85 yen, he said.

The yen has fallen 2.4 percent in the past week against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has depreciated 0.4 percent while the euro has gained 0.6 percent.

While the ECB faces pressure to join private-sector investors in taking losses on Greek securities, the central bank sees this as potentially damaging to confidence in the institution, according to two people familiar with the Governing Council’s stance, who declined to be identified because the matter is confidential.

Euro Risks

The cost to protect against a drop in the euro against the dollar increased for a fourth day. Risk-reversal rates for three-month options on the euro versus the dollar were negative 1.66 percent today from negative 1.65 percent yesterday. It has climbed from as low as negative 4.4 percent in November.

“The near-term risks are rising rapidly compared to where they were a week ago and that’s likely to put downward pressure on euro,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto. “We’ve had an environment of very low volatility so that is good for carry trades where Aussies is played on the long side.”

Implied volatility of three-month options of Group of Seven currencies rose to 10.66 percent, the most since Jan. 17, according to the JPMorgan G7 Volatility Index. An increase makes investments in currencies with higher benchmark lending rates less attractive as the risk in such trades is that market moves will erase profits.

Australia’s dollar rose to a 12-week high against the yen after one of the Reserve Bank’s measures of underlying inflation gained more than estimated, boosting speculation the central bank may have less scope to cut borrowing costs.

Australia’s dollar climbed 0.5 percent to 81.94 yen after earlier advancing to 82.15, the highest level since Nov. 1. The Aussie dollar was 0.2 percent weaker at $1.0467.

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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